Question

When international trade is considered, how net exports could be either positive or negative additions to the aggregate demand? In which of these cases would the impact of net exports be expansionary? Discuss by giving appropriate examples of scenario, data and/or diagrams to justify your answer.

Answer 1

Answer - The net exports is the difference between the export and import of the country. If the value of export is greater than import , the net exports will be positive and hence will add in the AD. If the exports are less than imports , the net exports amout will be negative and thus AD will reduce.

Suppose in the economy C is 100 , I is 200 , G is 600 and net export = 100

AD = 100+200+600+100

= $ 1000

Now in the same economy , net exports become (-100) and other remaining same

AD = 100+200+600-100

= $ 800

Thus this shows that the negative value of net exports decreases AD.